Solar photovoltaics

With a crowded marketplace of advisers, installers and developers and an increasingly volatile agricultural market it’s vital those farmers looking at an investment in solar PV have the information to make the right decision. Giles Hanglin, director of agribusiness and energy at Savills looks at the key areas to consider.

Solar photovoltaic (PV) panels intercept daylight and convert it into electricity which can be used directly by the farm or sold into the National Grid. The technology is particularly well-suited to agricultural enterprises because most have available roof space or land, a high-energy demand and good electricity connections.

Farmers who generate electricity from using solar panels can access the Feed-in Tariffs (FiTs) subsidy for 20 years, which allows them to command a payment for every kilowatt hour generated.

They can also export surplus electricity to the National Grid for additional income linked to the retail price index. Alternatively they can sell the surplus electricity they generate to a private buyer.

How do the Feed-in Tariffs work?

The Feed-in Tariffs were introduced by government in April 2010 to stimulate the uptake of low carbon renewable forms of energy generation.,/p>

But it was only ever introduced as a stimulant and as uptake has increased, the cost of solar PV has fallen dramatically – dropping by 50% between 2010 and 2012. With returns soaring, the government introduced a mechanism to reduce tariffs (degression) in line with expected decreases in technology costs.

Farmers across the UK were early adopters of the technology and were quick to install solar arrays on their roofs and on their land. It is now the most installed renewable technology with more than 600,000 sites across the UK as of September 2014, with a combined capacity of more than 5GW.

As a result the technology has been hit hardest by tariff degression. As of September 2012 the tariff has been reducing every three months, with the rate of reduction determined by the amount of installations in the preceding three months. The average rate of degression is about 3.5%.

Government support

The UK government has committed to a legally-binding target of generating 15% of energy from renewable sources by 2020. For solar in particular it is supportive of rooftop schemes and small-scale ground-mounted installations with the power that is generated being used on site as much as possible. It is also keen for large-scale solar installations on commercial buildings, rather than land-based investments.

Which farms does the technology suit?

Generating electricity from a renewable energy source is most suited to farmers who have a significant electricity requirement on farm. This could include grain driers or conveyors in an arable operation, heating requirements for a livestock farm or a site with tenants who use electricity during the day. Horticultural businesses are also attracted to solar in order to power lights and provide heat in glasshouses.

Since the FiTs reduced, the significant wins for farmers are in using the electricity generated on site and during daylight hours, improving their green credentials and lowering energy bills. Exporting electricity is now a less lucrative proposition, especially with the declining oil price seen at the end of 2014.

The location of the farm will also affect the return on investment – counties such as Cornwall with higher levels of daylight will perform better than farms in Scotland, for example.

Feasibility

The first step for any solar PV project is to check the National Grid connection. There may be no spare capacity, or the cost to upgrade the network to handle the electricity being generated may mean the project isn’t feasible.

A district network operator (DNO), of which there are seven in the UK, needs to know the farm’s meter point administration number (Mpan) to provide a situation report and quote for any upgrade work that may need to be carried out. Where work has to be carried out by the DNO in order to provide a connection, the cost can run into thousands of pounds, so this needs to be taken into account.

Farmers should also assess the farm’s suitability for the project – for roof-mounted schemes this means a structural survey of the building being used, and for ground-mounted schemes the likelihood of planning permission being granted is a key consideration.

Roof or ground mounted?

Solar panels are fitted to the roofs of buildings or installed on the ground. The first floating installation was carried out in the UK last year but the technology is not yet widespread.

How much electricity farmers want to generate, the financial situation of the business and the room they have available to install them will dictate which scheme is best.

Solar panels should be fitted as close to where the electricity is going to be used as possible, making rooftops and land adjacent to farm buildings attractive sites. For large-scale projects however, this may require a larger plot away from the farm.

A typical roof-mounted 50kw scheme will take up 350sq m, while a 50kWh ground mounted installation will stretch 100m if the panels were placed next to each other. A popular size for a ground-mounted installation is up to 1MW because it doesn’t create the huge export problems that large solar parks do and in the right location, can connect to the grid without significant upgrade costs. A 1MW array requires five acres of land.

Leasing your land to a developer

Farmers who don't have the capital to install solar panels on a larger scale and who simply want to earn a guaranteed rental income from their land, can strike a deal with a solar development company.

All that's required on behalf of the farm is to be able to offer an area of land that is deemed suitable by the solar developer for a period of 25 years.

Planning, installation and maintenance will all be carried out by the solar developer or their chosen operator with the landowner not having to commit any finance to the project.

Typically the income for the land owner is agreed from the outset and linked to a review mechanism such as retail price index (RPI).

A rental income would depend on the viability of the project and the location in the UK, but could start at £700-800/acre plus a share of the output of the solar park in some cases.

Buildings

Buildings need to have strong purlins and beams to hold the additional weight of the panels and fixings and the ideal roof will slope between 10 and 30deg and be south-facing. Extra structural work can take place to improve the building before the panels are installed.

Asbestos roofs are fine providing they are in good condition, with metal or composite roofs the best option.

Planning

Roof-mounted installations up to 50kWh do not require planning permission in most instances providing that they comply with the permitted development order that states, for example, that the panels are elevated no further than 20cm off the roof, are not in an environmentally protected area or within the curtilage of a listed building.

Ground-mounted schemes require a full planning application. These can be opposed, particularly if they are visible to the local community, so public engagement is advised to explain what the project is for and what it will look like. Typically sites which are going to use all the power to be greener businesses are looked on more favourably than those which are exclusively exporting to the National Grid. A fenced-off ground-mounted array has been proven to deliver biodiversity benefits for ground-nesting birds, and this can be included in a planning application.

How much does it cost, and what’s the return on investment?

The more sunlight the panels intercept, the more electricity will be generated.

Around the Midlands and Eastern areas of England a 50kw roof-mounted system will cost approximately £50,000 and if 75% of the electricity generated was used on site it could return between 12-15% of the investment. Exporting to the National Grid would only see an 8% return.

Solar PV costs and returns

System

50kW (roof-top) in Herts

150kW (ground) in N Essex

1MW (ground) in N Essex

Planning

£0

£4,540

£28,000

Grid upgrade

£0

£20,000

£50.000

Contractor

£5,500

£135,000

£850,000

Maintenance*

£12,000

£36,000

£261,900

Insurance*

£4,440

£13,717

£78,907

Export meter*

£5,951

£5,951

£5,951

Interest paid**

£16,670

£51,497

£306,986

Overall costs*

£77,891

£229,208

£1,349,758

Internal rate of return***

14.20%

13.24%

10.13%

Return on investment****

259.20%

258.82%

212.55%

Chart annotations:

The 50kw system assumes:

25% electricity exported, a 10p/kWh electricity saving and FiTs from 1 April 2015

The 150kw system assumes:

65% electricity exported, a 13.4p/kWh electricity saving and FiT from 1 April 2015

The 1MW system assumes:

78% electricity exported, a 13.4p/kWh electricity saving and FiTs from 1 April 2015

* Costs over 20 years
** If 100% borrowed
*** Return on capital investment excluding inflation, interest rates and other external factors
**** After 20 years

Getting paid for your power

Payments are very quick once the solar panels are operational. Generation meter readings are submitted to the government by a FiTs provider, such as Good Energy, every quarter and payments are made three months later in arrears.

It will be six months after start up before the first payment is made and then payments will be quarterly for the remainder of the 20-year FiTs term. Selling power directly back to the grid is not your only option though and it worth shopping around for the best buyer for your power.

For example Power Purchase Agreements with suppliers or businesses that have an obligation to source green electricity can secure you a higher price per kWh than you might get from exporting to the grid. For large-scale projects private wire agreements allowing you to sell direct to a neighbouring business are also becoming feasible. This may ultimately dictate the scale of the project you go for so it is worth considering early on.

Maintenance

Appointing a good installer with a proven track record is important because if something goes wrong with the panels, farmers need the peace of mind that the company will still be around to rectify the problem.

Ensuring that a good warranty accompanies the work is prudent – typically a 10-year warranty applies to panels and five years for the inverter (the technology which turns the power into alternating current to use around the domestic system).

Panels are generally self-cleaning if they slope more than eight degrees, but farms with dust or bird problems may want to invest in netting or deterrents to reduce problems.

Tax considerations

The annual investment allowance permits £500,000 to be invested for each qualifying tax year by the end of 2015 and offset directly against income.

Many farmers will spend this allowance on machinery but using it for a renewable energy project will provide you with a financial return. Make a careful check of eligibility for relief before investing – the way the allowance works in relation to your accounting year end can have a big effect on the value of this allowance.

Six questions you must ask the installer before installing solar panels

What is the duration, terms and condition of any manufacturer or installer warranties offered?

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